Transcript of podcast:
If you are a mutual fund investor, you would have seen that returns on your investments in actively managed equity and fixed income funds largely follow the market. When broad equity indices such as the Sensex and Nifty are rising, equity funds returns also increase and when Sensex and Nifty are falling, equity fund returns too fall. Debt funds too follow the interest rate cycle, returns rise when interest rates fall and returns fall when interest rates rise.
The difference in returns from one mutual fund scheme to another mutual fund scheme is also not very high. At least for the larger funds, returns will not be well above or well below their peers and this is largely due to competition, where one fund manager cannot lag peers.
In short, returns from mutual fund schemes are a commodity that is easily available. You can pick any well known brand from the shelf and you will find that you are in line with everyone else in terms of your returns on your investments.
When returns are a commodity, why do you need to pay anyone for advise to tell you which fund to invest in. You can stick to the fund that you are comfortable with, if you are an existing investor and if you are a new investor, you can go for the fund that services you the best.
Like any product, each mutual fund provide you the necessary material for you to judge their performance or you can browse through sites that provide you the information on portfolios, costs etc.
You need to ask yourself “why am I paying fees directly or indirectly through higher fund charges to a financial advisor on which funds to invest in”.
The reason to pay for advise is for an independent view of the advisor on the outlook for markets. If an advisor is telling you to invest in equity mutual funds, the advise is to be backed up by his or her own views on equity markets, whether the future is good for stocks, what kind of stocks will do well, what are the disruptions happening in the business, outlook for the economy, state of global markets and other such factors that go into performance of equity markets. Based on the market analysis, the fund recommendation should also tie in with the view or indexing of returns is the best way to ride the equity upside.
Advisors should also tell you when to sell or stay away from equity markets. Equities usually go through booms and busts, and getting stuck at the top of booms can both lead to sharp fall in returns or even capital erosion as well as loss of risk appetite for equities.
Similarly when it comes to fixed income funds, your advisor has to have a clear view on interest rates and credit spreads that in turn will determine your fund investments.
Your advisor has to also constantly update you on the market outlook as markets are inherently dynamic and are subject to violent changes that can completely alter their course.
Pay for the views and not for the vehicle of investment.
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